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Stock Market Crash

Survival Guide

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Stock Market Crash Survival Guide

Many investors believe that the 2008 Crisis was THE Crisis of their lifetimes.

They are mistaken.

The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis. It was just
Round One.

Round Two, or THE Crisis, concerns the biggest bubble in financial history: the epic Bond
bubble… that, as it stands, is north of $100 trillion.

To put this into perspective, the Tech Bubble was about $15 trillion in size. The Housing
Bubble, which triggered the 2008 Crisis, was about $30 trillion in size.

The bond bubble today is over $100 trillion. And if you include derivatives that trade based on
the prices of bonds, it’s $555 trillion.

So we are talking about a problem that is exponentially larger than anything you or I
have seen before.

How is this possible?

By way of explanation, let’s consider how the current monetary system works…

The current global monetary system is based on debt. Governments issue sovereign bonds,
which a select group of large banks and financial institutions (e.g. the Primary Dealers in the
US) buy/sell/ and control via auctions.

These financial institutions list the bonds on their balance sheets as “assets,” indeed, the
senior-most assets that the banks own.

The banks then issue their own debt-based money via inter-bank loans, mortgages, credit
cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans
or debt. In this sense, money is not actually capital but legal debt contracts.

Because of this, the system is inherently leveraged (uses borrowed money).

Consider the following:

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1) Total currency (actual cash in the form of bills and coins) in the US financial system is a
little over $1.2 trillion.

2) If you want to include money sitting in short-term accounts and long-term accounts the
amount of “Money” in the system is about $10 trillion.

3) The US stock market is about $19 trillion in size.

4) The US bond market is well over $38 trillion.

5) Total debt (or bonds) in the US financial system is well north of $60 trillion.

6) If you include derivatives based on these bonds, the US financial system is nearly $200
trillion.

Bear in mind, this is just for the US.

Put simply, the Debt or Bond Bubble is far more systemically significant than stocks. The below
chart shows both stocks and debt as a percentage of GDP. As you can see, the results are not
even close.

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The size of the bond bubble alone should be enough to give pause.

However, when you consider that these bonds are pledged as collateral for other
securities (usually over-the-counter derivatives), the full impact of the bond bubble
explodes higher to $555 TRILLION.

To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the
financial system in 2008 was only a tenth of this ($50-$60 trillion).

Moreover, you have to consider the political significance of this bubble.

For 30+ years, Western Governments have been papering over the decline in living standards
by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect
in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again,
overspending is never a temporary issue. This is compounded by the fact that the political
process largely consists of promising various social spending programs/ entitlements to
incentivize voters.

In the US today, a whopping 47% of American households receive some kind of Government
benefit. This type of social spending is not temporary… this is endemic.

The US is not alone… Most major Western nations are completely bankrupt due to
excessive social spending. And ALL of this spending has been fueled by bonds.

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This is why Central Banks have done everything they can to stop any and all defaults from
occurring in the sovereign bond space. Indeed, when you consider the bond bubble everything
Central Banks have done since 2008 begins to make sense.

1) Central banks cut interest rates to make these gargantuan debts more serviceable.

2) Central banks want/target inflation because it makes the debts more serviceable and
puts off the inevitable debt restructuring.

3) Central banks are terrified of debt deflation because it would burst the bond bubble and
bankrupt sovereign nations.

So how will the bond bubble play out?

At some point the bubble will burst as all bubbles eventually do. The first indication will be a
rise in delinquencies and defaults in the Junk bonds space and in “at risk” sovereigns such as
Greece and Spain.

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However, eventually most of the debt markets will either be defaulted on or restructured.
There are simply too few assets acting as the backstop for too much debt/ leverage.

In pictorial terms, the red line is simply too far above the black line.

When the bond bubble bursts, we will finally experience a systemic reset. And when I say
“systemic” I mean it. The 2008 Crisis, during which everyone thought the world was ending,
was in fact just a tiny blip in the US’s mountain of debt. So imagine what it would feel like for
that red line to drop 20% or 50%?

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Once the bond bubble bursts, the fallout will be extreme. By the time it’s all over, I expect:

1) Numerous emerging market countries to default and most emerging market stocks to
lose 50% of their value.

2) Japan to have defaulted and very likely enter hyperinflation.

3) US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P
500.

4) Gold to break above $2,000 and likely go to $5,000 (only after Central Banks unveil the
“nuclear” round of QE in response to the crisis).

5) Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

6) The Too Big to Fail banks to ultimately go bankrupt and very likely be broken up.

This is indeed some scary stuff. However, fortunately there are some very basic strategies you

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can employ to preserve your wealth through this.

Strategy #1: Move Some Capital Into Cash

Perhaps the easiest step you can take is to move a portion of your capital out of various risk
assets and into cash when the crisis begins.

You see, once we enter a state of global deleveraging, it will reduce the amount of currency in
circulation.

This of it this way… when someone takes out debt, they are effectively shorting the currency in
which the debt is denominated. So if you’re borrowing in $USD for instance you are effectively
shorting the $USD.

Thus, when the bond bubble bursts, and borrowers begin to default upon and restructure their
debt, it will reduce the amount of currency in circulation.

Consider the 2008 crisis: the last time we experienced a degree of deleveraging in the US
financial system. As the amount of debt securities in the US was reduced the $USD rallied
strongly.

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I cannot provide specifics about what percentage of your portfolio you should keep in cash
because everyone’s risk profile is different. But I would have roughly 2-3 months’ worth of life
expenses in cash should we get a true systemic reset when the bond bubble bursts.

Strategy #2: Buy Some Bullion (both Gold and Silver)

Another easy way to prepare for the bond bubble’s bursting is to move a portion of your wealth
into Gold or Silver bullion. Because many investors are unfamiliar with this asset class, I’ve
arranged this strategy in a Question and Answer form.

What is bullion?

Bullion is simply another term for actual, physical Gold or Silver as opposed to “paper” Gold or
Silver, which trades via either the futures market or in one of the various Gold-or Silver-based
Exchange Traded Funds (ETFs).

Bullion comes in one of two forms: coins or bars. Coins typically contain an ounce of pure Gold
or Silver. Bars range in size from one ounce up to 400+ ounces. You can buy either for a small
premium over “spot” price or the current market value of Gold or Silver.

What are the most common forms of bullion?

In terms of gold coins, there are three coins that comprise the bulk of the bullion market. They
are Kruggerands, Canadian Maple Leafs, and American Gold Eagles. We suggest avoiding Maple
Leafs because they can easily be scratched which damages the gold and reduces the coin’s
value.

In terms of Silver coins, the easiest way to purchase bullion is via pre-1965 coins (often termed
“junk” silver). However, you can also get silver one-ounce rounds (coin-like medallions) or
Silver Eagle coins which also contain one ounce of Silver.

In terms of bars, you can buy either Gold or Silver bars in a variety for forms. However, they are
much bulkier, usually weigh considerably more, and are harder to move around.

Why should I own bullion?

Historically, many investors have argued that there was no point to owning bullion since it
didn’t produce any cash flow. However, with the majority of Government bonds now yielding
less than 1% and over $5 trillion sporting negative yields, this argument is no longer valid.

Owning bullion is a means of securing your wealth outside of “paper money” or the cash that

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the Central Banks want to tax. Provided you store it securely, it’s a means of preserving your
capital and keeping it under your control.

Why should I own bullion instead of an Exchange Traded Fund (ETF) that owns bullion?

There is considerable evidence to suggest that the Gold and Silver ETFs do not actually have all
the Gold or Silver they claim to. However, regardless of whether this is completely true, at the
end of the day it is much safer to have your own physical Gold or Silver in hand as opposed to
buying a paper-based ETF run by a bank or other financial entity that claims it owns Gold and
Silver.

After all, if the firm that owns the Gold goes bankrupt, there’s no guarantee that you’ll get your
hands on your share of the bullion any time soon, if at all. This completely defeats the purpose
of buying Gold or Silver: to store your wealth safely.

How much Gold or Silver bullion should I buy?

How much you purchase is up to you. We suggest having at least several months’ worth of
expenses in Gold and Silver bullion. Some investing legends have as much as 20% of their
portfolios in bullion.

Why should I buy both Gold and Silver?

Because if a bank holiday is ever declared… or if paper money is worthless, you don’t want to
be walking around with an ounce of gold (worth $1k+) to buy groceries.

Instead, you will want some precious metals of smaller denomination to purchase goods or
barter with, hence the need for some Silver.

How do I buy Gold or Silver bullion?

The safest way to buy bullion is from a dealer. There are literally hundreds of dealers to choose
from. The US mint provides a list of authorized coin dealers on its website:

http://www.usmint.gov/mint_programs/american_eagles/?action=lookup

We cannot tell you which dealer to go with, but look for someone who’s been dealing for years
(not a newbie). You should ALWAYS ask for references from the dealer (former clients you can
talk to about their purchases/ experiences).

Be sure to talk to the dealer for some time and ask him or her numerous questions about the

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industry, different types of coins, etc. (feel free to test him or her on the information we’ve
provided you with above e.g. the three most liquid Gold coins, etc.).

If they can answer everything you ask in a knowledgeable fashion, their references check out,
and you verify everything they say with a 3rd party, you should be OK.

Some warning signs to avoid are dealers who try to store your bullion. Never, ever store your
bullion with someone else. Always store it yourself.

How should I store my bullion?

In terms of storing your bullion, you can store it in a safe deposit box at a bank or buy a home
safe from Target or Wal-Mart (or a specific safe store). Personally, I distrust safe deposit boxes
because part of the reason for having Gold or Silver on hand is in case there’s a run on the
banks or a bank holiday is declared. For that reason, I suggest having at least some bullion in a
personal safe.

You can get a decent safe for anywhere between $100 and $1,000. Both Target and Wal-Mart
sell decent models for $50-$300. However, there are plenty of other more sophisticated safes
out there.

On a side note DO NOT tell people about your bullion stash OR your safe. Trust virtually NO
ONE with this information except your closest loved ones (and we mean CLOSEST).

If I buy bullion and the crisis doesn’t hit soon… won’t I miss out on stocks’ gains?

No. CNBC will never tell you this, but the fact of the matter is that Gold has dramatically
outperformed the stock market for the better part of 40 years.

I say 40 years because there is no point comparing Gold to stocks during periods in which Gold
was pegged to world currencies. Most of the analysis I see comparing the benefits of owning
Gold to stocks goes back to the early 20th century.

However Gold was pegged to global currencies up until 1967. Stocks weren’t. Comparing the
two during this time period is just bad analysis.

Once the Gold peg officially ended with France dropping it in 1967, the precious metal has
outperformed both the Dow and the S&P 500 by a massive margin.


See for yourself… the below chart is in normalized terms courtesy of Bill King’s The King Report.

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According to King, Gold has risen 37.43 fold since 1967. That is more than twice the
performance of the Dow over the same time period (18.45 fold). So much for the claim that stocks
are a better investment than Gold long-term.

Indeed, once Gold was no longer pegged to world currencies there was only a single period in
which stocks outperformed the precious metal. That period was from 1997-2000 during the
height of the Tech Bubble (the single biggest stock market bubble in over 100 years).

In simple terms, as a long-term investment, Gold has been better than stocks for over 40 years.
So owning Gold bullion, like US Dollars, will not only shelter your capital from systemic risk, but
will actually GROW your purchasing power more rapidly!

Strategy #3: If You Must Own Stocks, Move Into High
Quality Companies

If you DO have to stay invested in stocks, you should shift into High Quality, Blue Chip
companies.
The reasons for this are as follows:

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1) High Quality, Blue Chip stocks will fall less than smaller, riskier companies when the
Crisis hits.

2) High Quality, Blue Chip companies have more stable profits and so will be able to pay
out dividends during market downturns.

3) High Quality, Blue Chip companies are actually even MORE attractive when their prices
fall.

Consider Coca-Cola (NYSE: KO) as an example.

KO is one of the best, most profitable brands in the world. The competitive moat around this
business is extraordinary and it remains one of the most easily recognized franchises on the
planet. You can drink six glasses of Coke a day and still enjoy it the next day. That quality is
almost nowhere to be found in any other food/ beverage on the planet: even chocolate would
get old after six bars a day.

The quality of this business shone during the 2008 Crisis, when KO’s stock only fell 24%
compared to the S&P 500’s drop of 36% and the Russell 2000’s drop of 30%.

Not only did KO actually grow profits during a year in which the global economy imploded, but

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it actually increased its dividend. So those investor who held throughout the crisis were
actually paid to wait.

Moreover, when KO’s stock fell it became even more attractive as an investment.

Let me explain.

Volatility can either hurt you or be your friend. Most people would sell a position if it fell 20-
30%. This is wise if you’re investing based on momentum. However, if you’re investing based
on value, then doing this is completely antithetical to attaining high returns.

Consider Coke. Let’s say Coke’s share price collapsed 50% from $40 to $20 per share. Most
investors would panic and sell. A value investor, on the other hand, would be buying greedily.

Why?

Because Coke’s business has a fundamental value. Even during a Financial Crisis and
Depression, people will continue to drink soda.

So the opportunity to buy Coke at $20 a share would be truly an extraordinary opportunity.
Indeed, from an income perspective alone, the investment potential here would be fantastic.

Consider that in 2008 when everyone thought the world was ending, Coke paid out $0.76 in
dividends. With shares at $20, this meant a dividend yield of 3.8%, which is a very reasonable
return.

However, let’s say you were wise enough to recognize that Coke offered even MORE value at
$18 and added to your position in Coke when its shares fell to $18.

If you did this, and held on to your position, you would currently be locking in a massive yield.

In 2014, KO paid out $1.22 per share in dividends. Based on your buy price of $18 per share,
you would be collecting a massive return of 6.7% per year ($1.22/ $18.00 = 6.7%) from
your investment.

Like I said before, High Quality Blue Chip companies like Coke are even MORE attractive when
their share prices fall.

So, if you HAVE to remain invested in stocks to the long side for whatever reason, now is the
time to be moving into high quality companies. This means finding companies with low debt,
lots of cash, strong results (KO actually GREW revenues in 2008), and significant competitive

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advantages.

Also, and this is critical, look for companies with strong balance sheets: companies that will still
EXIST if there’s another Crisis. Depression or no, people will still drink soda, alcohol, smoke
cigarettes, and need medicine. I’ve compiled a list of companies you should consider if you need
to remain involved in stocks going forward:

Company Symbol Sector
Coca-Cola KO Beverages
Budweiser BUD Alcohol
Johnson & Johnson JNJ Healthcare
Wal-Mart WMT General Retail
Exxon Mobil XOM Oil & Gas
Kraft Heinz KHC Food and Beverages
Microsoft MSFT Software
Pfizer PFE Pharmaceuticals
Intel INTC Microchips
Procter & Gamble PG Consumer Goods

I want to stress that these investments are only if you HAVE to stay in stocks for some reason. If
there is another collapse these companies will fall like everything else. However, they will likely
fall less than the rest of the market.

Strategy #4: Catastrophe Insurance: Trades For When the
Collapse Hits

This final strategy is not without risk. You should only consider the investments detailed here
if you are an active trader (someone who knows how to read market movements on a week by
week basis).

The reason for this is that should the Crisis go systemic and begin to take down large banks, you
could very well lose all of the capital you put into these trades (more on this later).

Having said that, there are a number of ways you can profit from the markets falling.

They include:

1) Buying puts (options that profit when the market falls).

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2) Shorting futures

3) Buying UltraShort ETFs

Of these three, UltraShort ETFs are the most accessible to ordinary investors.

If you’re unfamiliar with UltraShort ETFs, these are investments that return two times the
inverse performance of a particular ETF. Consider the UltraShort Financials ETF (SKF) as an
example.

SKF returns two times the inverse of the Financials ETF (IYF). So if IYF falls 5%, SKF rises 10%.
If IYF falls 10%, SKF rises 20%. And so on.

There are quite a few UltraShort ETFs you can use to profit from a collapse in different market
indexes or in individual sectors.

Below is a list of the most liquid, popular UltraShort ETFs.

1) The UltraShort S&P 500 ETF (SDS)

2) The UltraShort Dow Jones Industrial Average (DXD)

3) The UltraShort Russell 2000 ETF (TWM)

4) The UltraShort Financials ETF (SKF)

5) The UltraShort Real Estate ETF (SRS)

6) The UltraShort Materials ETF (SMN)

7) The UltraShort Emerging markets ETF (EEV)

8) The UltraShort China ETF (FXP)

9) The UltraShort Brazil ETF (BZQ)

As I stated before, these investments are not without their risk.
The reason is that they are in fact based on derivatives owned by the large banks.

Put another way, when you buy the UltraShort Financials ETF (SKF) you are not actually
shorting all of the financial companies’ stocks located in the Financials ETF (IYF).

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Instead, you own the rights to derivatives that are meant to produce the intended return the
UltraShort ETF promises. Because of this, should the bank or financial entity that issues the
UltraShort ETF go bankrupt, it’s possible you could lose your position entirely.

This would not happen instantly. All Crisis take time to unfold. The Tech Crash, for instance,
took two years to complete.

So when the next Crisis hits, there will a window of time in which UltraShort ETFs will offer you
the chance to see enormous returns. However, at some point, if the Crisis gets bad enough, it
will be best to get out of these investments altogether.

I cannot tell you when this would be as it will all be contingent on how Central Banks
react to the next round of the Crisis as well as your personal risk appetite.

All I can say is that when the markets take a nosedive, UltraShort ETFs will offer the potential
for extraordinary gains. But once the Crisis becomes truly systemic (meaning banks are failing)
UltraShort ETFs will no longer be safe to invest in.

This concludes this Special Report. In it, we’ve outlined the nature of the bond market bubble,
as well as three easy to implement strategies to protect your wealth from the coming Crisis.

Thank you for reading…

Best Regards,

Graham Summers
Chief Market Strategist
Phoenix Capital Research

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